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OMNOVA Solutions Inc. Reports Operating Results (10-Q)

March 26, 2009 | About:

OMNOVA Solutions Inc. (OMN) filed Quarterly Report for the period ended 2009-02-28.

Omnova Solutions Inc. develops manufactures and markets emulsion polymersspecialty chemicals and decorative and building products for a variety ofindustrial commercial and consumer markets. The Performance Chemicals unit's broad range of emulsion polymers and specialty chemicals are used as coatings binders adhesives and additives for paper carpet textile and various other industries. OMNOVA Solutions Inc. has a market cap of $74.6 million; its shares were traded at around $1.7 with a P/E ratio of 28.4 and P/S ratio of 0.1. OMNOVA Solutions Inc. had an annual average earning growth of 2.1% over the past 5 years.

Highlight of Business Operations:

Performance Chemicals net sales decreased $24.3 million, or 20.4%, to $94.6 million during the first quarter of 2009 compared to $118.9 million during the first quarter of 2008. The lower sales were driven by weaker volume of $32.0 million as customers took significant downtime to reduce inventories, and unfavorable foreign exchange translation of $2.0 million partially offset by higher selling prices of $9.7 million. Net sales for the Paper and Carpet chemicals product line decreased to $61.9 million during the first quarter of 2009 compared to $77.6 million during the first quarter of 2008. Net sales for the Specialty Chemicals product line decreased to $32.7 million during the first quarter of 2009 compared to $41.3 million during the first quarter of 2008.

This segment generated an operating profit of $7.8 million in the first quarter of 2009 compared to $2.6 million in the first quarter of 2008. The increase in segment operating profit was primarily due to lower raw material costs of $2.1 million, improved pricing of $9.7 million and lower other manufacturing costs of $0.5 million partially offset by lower volumes of $7.0 million. The segment operating profit also includes items which management excludes when evaluating the results of the Companys segments. Those items for the first quarter of 2009 include workforce reduction costs of $0.1 million.

Decorative Products net sales decreased $6.1 million, or 8.5%, to $65.6 million in the first quarter of 2009 from $71.7 million in the first quarter of 2008 primarily due to lower volumes of $16.2 million, and unfavorable foreign exchange translation of $3.7 million, partially offset by improved pricing of $1.4 million. The Asian businesses generated net sales of $20.6 million in the first quarter of 2009 compared to $8.1 million in the first quarter of 2008. The first quarter of 2008 includes one month of consolidated sales from the Asian businesses, which were acquired in January 2008, while the first quarter of 2009 includes three months of consolidated sales. Contract Interiors net sales were $22.1 million in the first quarter of 2009 compared to $31.5 million in the first quarter of 2008. Net sales for the Coated Fabrics product line, excluding the Asian businesses, decreased to $12.7 million during the first quarter of 2009 compared to $16.9 million during the first quarter of 2008. Net sales for the Laminates product line decreased to $10.2 million during the first quarter of 2009 compared to $15.2 million during the first quarter of 2008.

The segment operating loss was $2.9 million for the first quarter of 2009 compared to $0.1 million for the first quarter of 2008. The higher operating loss was primarily due to lower volumes of $4.3 million, higher manufacturing absorption and overhead costs of $1.1 million, and higher utility costs of $0.3 million, partially offset by higher pricing of $1.4 million, lower raw materials of $1.2 million, improved results at the Asian operations of $0.9 million and a LIFO inventory reserve adjustment of $0.1 million. The segment operating profit also includes items which management excludes when evaluating the results of the Companys segments. Those items for the first quarter of 2009 include workforce reduction costs of $0.7 million.

In the first quarter of 2009, $1.4 million was used for investing activities, as compared to $28.1 million in the first quarter of 2008. Included in the first quarter of 2008 is the acquisition of the Decorative Products Asian businesses for $28.0 million which was funded through borrowings under the revolving credit facility. The first three months of 2009 includes $1.4 million for capital expenditures compared to $3.1 million in the first three months of 2008. Capital expenditures were made and are planned principally for asset replacement, new product capability, cost reduction, safety and productivity improvements and environmental protection. The Company anticipates capital expenditures in 2009 to be approximately $12 $14 million. The Company plans to fund substantially all of its capital expenditures from anticipated cash flow generated from operations during the remainder of the year. If necessary, a portion of capital expenditures can be funded through borrowings under its credit facility, which has $37.9 million available for future borrowings as of February 28, 2009.

In connection with the Term Loan, on May 22, 2007 the Company amended its Senior Secured Revolving Credit Facility (Facility). The Facility was increased to $80 million from $72 million and extended until May 2012. In January 2008, the Facility was increased to $90 million. The Facility is secured by domestic accounts receivable, inventory (collectively the Eligible Borrowing Base) and intangible assets. Availability under the Facility will fluctuate depending on the Eligible Borrowing Base and is determined by applying customary advance rates to the Eligible Borrowing Base. The Facility includes a $15 million sublimit for the issuance of commercial and standby letters of credit and a $10 million sublimit for swingline loans. The Facility contains affirmative and negative covenants, similar to the Term Loan, including limitations on additional debt, certain investments and acquisitions outside of the Companys line of business. If the average excess availability of the Facility falls below $20 million during any fiscal quarter, the Company must then maintain a fixed charge coverage ratio greater than 1.1 to 1 as defined in the agreement. The Company was in compliance with this requirement and the fixed charge coverage ratio was 2.7 to 1 for the first quarter of 2009. The Company may request an additional increase in available borrowings under the Facility of up to $10 million (for a maximum of $100 million) upon satisfaction of certain requirements.

Read the The complete ReportOMN is in the portfolios of Seth Klarman of The Baupost Group.

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